Financial Services sector comment – July 2016

Disruptive innovation is a common theme in today’s financial services sector, with everything from lending methods (P2P/crowdfunding) and insurance broking channels (price comparison websites) to risk underwriting (use of telematics and big data analytics) and currencies (cryptocurrencies) being fundamentally changed by emerging technologies. In this regard, probably one of the most revolutionised sectors is payments.

Modern payments have become no more than packs of digital information being transferred through the internet from one bank to another, increasingly through a convenient mobile app. Throughout the evolution of payment methods, one requisite remained paramount: the security of payments. To this end the modern payments industry has witnessed the development of several intermediaries such as payment processors, payment gateways, merchant account providers and card networks who are competing to provide the most efficient and secure ways possible to store and transmit payment information.

Recent years have seen high levels of M&A from trade buyers and institutional investors alike. Large payments companies sought to consolidate the sector while reducing the threat of successfully innovative businesses challenging the market. In June, Visa finalised the acquisition of its European counterpart from Worldpay, Lloyds Bank, Barclays and others, in a mega deal initially worth €21.2bn but subsequently altered to settle the European Commission’s anti-trust concerns. In March last year, Optimal Payments (now known as Paysafe Group Plc) acquired online payment solutions provider Skrill from CVC Capital Partners, for a total enterprise value of €1.12bn at an EBITDA multiple of 13.9x. Following the deal, the combined group joined the London Stock Exchange. In a smaller deal at the beginning of this year, Capita acquired PayPoint’s online payments business for €19.4m.

Payments businesses are not the only ones acquiring their peers. Private Equity has also been interested in investing attracted by the high-growth prospects of the market. At the end of last year, GrovePoint Capital acquired an 80% stake in Payzone in a secondary buy-out from Duke Street, for a consideration of €47.5m. Also in 2015, in a more sizeable deal, Corsair Capital together with Palamon Capital Partners acquired the provider of international payment solutions company Currencies Direct in a transaction valued at €283m.

Finally, venture capitalists have extended their funds to disruptive payment start-ups which are rapidly gaining scale and awareness. In April 2016, and a consortium of investors have continued to back azimo, a UK-based digital money transfer network while Accel Partners have invested in GoCardless, a provider of payments gateway.

As illustrated by the number of deals, the payments sector has been very active with a high degree of consolidation. Clearwater expects this trend to continue as market consolidators look for synergies and complementary services as well as innovative new market entrants.

A selection of recent deals in the Financial Services sector:

PIB Ltd acquired Channel Insurance Brokers Ltd, a St Peter Port-based insurance brokerage company. Financial details were not disclosed.

Dunedin LLP completed the acquisition of Kingsbridge Risk Solutions Ltd., the insurance brokerage and risk management company, from Livingbridge.

Tech Mahindra Ltd, the India-based BPO company, entered into an agreement to acquire Target Group Ltd, the provider of software and services for financial institutions, from Pollen Street Capital for an enterprise value of approximately €147m in cash.

France’s AXA sold its UK investment, pensions and insurance businesses, including SunLife, to UK insurer Phoenix in a €493m deal.

Equistone Partners Europe completed the acquisition of The Farleigh Group Ltd, the financial advisory firm.

Curtis Banks completed the acquisition of Suffolk Life Group and its subsidiaries from Legal & General after receiving approval from the FCA and the PRA.